the knowledge gap: what does the public really know about ...you might not have enough money to pay...

The Knowledge Gap: What Does the Public Really The Knowledge Gap: What Does the Public Really Know About Retirement Risks?Know About Retirement Risks?

Anna Rappaport, FSA, EA, MAAAAnna Rappaport Consulting

Chair, SOA Committee on Post-Retirement Needs and Risks

Ruth L. HelmanResearch Director, Mathew Greenwald and Associates, Inc.

June 19, 20061:00pm – 2:00pm

1

Today’s Presentation

Focuses on – System successes and failures – Puzzles and Implications

Builds on results from – 2005 Risks and Process of Retirement Survey– Focus Groups on Financial Management in

RetirementSupplemental data in the Appendix

2

Agenda

Introduction and contextThe big puzzles and related resultsMoving into future/recommendations

3

Introduction and Context

Committee on Post-Retirement Needs and RisksSuccesses and failuresContextRelated Studies

4

SOA Committee on Post-Retirement Needs and Risks

Focus is on understanding of and mechanisms to assist in distribution phaseWork– Risk Chart– Risks and Process of Retirement Surveys

• 2001, 2003 and 2005– Retirement Plan Preferences Survey

• in conjunction with the Academy– Misperceptions Paper– Focus Groups on Financial Management in

Retirement

5

Successes and Failures

While Americans do not save well on their own, they have come to expect to save in 401(k) plans and 70% to 80% offered plans participate

Social Security benefits – major impact on older, disabled Americans plus survivors

PBGC insurance protects a moderate level of defined benefit plan benefits

Employer system results in benefits and savings for millions of Americans who would not have anything other than Social Security without employer plans

Housing values important for retirement wealth

Employer system has accumulated $11 trillion in assets – good benefits for long service people in many companies

DB plans provide lifetime income for many retirees today – vast majority of these plans pay benefits as promised

Major reductions in poverty rates among elderly couples – now about 5%

Many people are happy in retirement todayMany people can choose to retire

Successes

6

Successes and Failures

Mobile employees do not fare well in final pay DB plans

DB funding rules designed to balance benefit security and tax deductible limits have not worked well under difficult economic scenarios (perfect storm)

DB plans are being frozen or terminatedRules for cash balance plans not clarified

People save in 401(k) plans, but many stay in default options, use money too early, and do not invest well

While many companies and industries have done well, others have not and bankruptcies have led to job loss and frozen benefits

PBGC guarantees do not protect entire DB benefit (which some people would consider appropriate)

Many working Americans do not have employer coverage

Some DB plans are underfunded today and PBGC facing financial difficulty

Poverty rates much higher for widows, divorced, single older women – 15% to 20% range

Substantial gaps in financial literacy and retirement knowledge and Americans do not save well on their own

About four in 10 retire before they choose –premature retirement often due to job loss, poor health

Failures

7

21st Century Challenges

Demographics: aging population + low fertility = increasing dependency ratios– People need/want to work longer – Fewer entrants to labor force– Stress on intergenerational transfers/pay-as-you go programs

Adjusting to evolving definition of retirementGlobal competition: pressure on labor costsRegulatory uncertainty/litigationLiving with new accounting rulesFewer DB plans with regular income payoutLow savings rates and financial literacy

8

Dangers to Future Retirement Security

Decline in existing systems to provide benefits without employee action and threats to systemsLack of knowledge on the part of individuals– Retirement planning has been an intuitive process

Psychological/economic barriersLack of role modelsFailure to act on knowledgeFalse sense of confidence about– Ability to work later in life– Ability to get high returns on investments– Not needing long-term care

9

Big Questions

What is appropriate role of government, the employer and the individual? How should risk be shared? Can each party realistically meet their commitments?What are appropriate eligibility ages to start benefit payments (retirement ages)?How important is lifetime income?Are there special issues for the boomers, a cohort in the middle of a transition?

10

Agenda

Introduction and contextThe big puzzles– Risk perceptions– Longevity – Life income– Longer work– Adequacy

Moving into future/recommendations

11

Puzzles Around Risk Perceptions

Pre-retirees are worried, but worry doesn’t translate into action Result– Retirees’ perception of risk associated with

level of control – Perceive less risk if they have control, even if

control generates risk (e.g., investments)Both pre-retirees and retirees fail to understand consequences of longevity risk

12

46%

52%

46%

57%

48%

46%

43%

55%

47%

43%

51%

NA

75%

61%

79%

78%

66%

71%

58%

63%

54%

59%

65%

NA

How concerned are you that . . . ? (percentage very or somewhat concerned)

You might not have enough money to pay for adequate

(2003/2001: good) health care

You might not be able to maintain a reasonable standard

of living [for the rest of your life]

You might not be able to keep the value of your savings and investments up with inflation

You might not have enough money to pay for [a nursing home/ nursing care at home]

Source: Society of Actuaries, 2001, 2003 and 2005 Risks and Process of Retirement Surveys

Retirees(2005 n=302)

Pre-retirees(2005 n=300)

2005 2003 2001

Concerns About Risk Fairly Constant

13

Agenda

Introduction and contextThe big puzzles– Risk perceptions– Longevity – Life income– Longer work– Adequacy


14

Puzzles Around Individual Understanding of Longevity Risk

Potential variability of life expectancy beyond grasp of most peopleRecent and continuing gains in life expectancy aren’t factored into – Design of retirement system – Personal life expectancy estimates

• More influenced by parents, family history

Result– More people underestimate than overestimate– Financial planners often still focus on average

Big problem for future

15

At Least 6 in 10 Underestimate Average Life Expectancy

42%

25%

4%

10%8%

12%

40%

20%

12%16%

6% 5%

- 5+ years -1 to -4 years On target 1 to 4 years 5+ years Don't know

Retirees (n=302) Pre-retirees (n=300)

Until what age do you think the average person your age and gender can expect to live?

Source: Society of Actuaries, 2005 Risks and Process of Retirement Survey

Difference Between Population Life Expectancy1 and Respondent Estimate

1Based on UP94 Life Tables projected to 2005.Underestimate Overestimate

16

Few Understand Financial Consequences of Outliving Assets

24%

34%

19%

22%

14%

21%

32%

21%

24%

22%

31%12%

14%

23%

29%

36%

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Very likely Somewhat likely

If you (and your spouse) were to live five years longer than expected, how likely do you think it is that you would have to do each of the following?(Retirees, n=302; Pre-retirees, n=300)


(53%)

(70%)

(42%)

(54%)

(43%)

(36%)

Dip into money that you might otherwise have left to your

children or other heirs

Reduce your expenditures significantly

Use the value of your home to help fund your remaining

retirement years

Deplete all of your savings and be left only with Social Security and

other government programs

(35%)

(45%)

17

Agenda

Introduction and contextThe big puzzles– Risk perceptions– Longevity– Life income– Longer work– Adequacy


18

Puzzles Around Life Income

We know people prefer lifetime income, but once they leave DB plans, people don’t act to ensure this– Many self-annuitization strategies – Could be because many of today’s retirees still have annuity

sources other than Social Security

Result – Lack of understanding as to which strategies insure risk– More fear of dying young than living long favors certain strategies

Questions– What is the minimum income needed for security for those without

DB plans?– How do we build awareness of survivor needs?– What problems will these choices create?

19

Few Turn to Risk Reducing Products Other Than Supplemental Health Coverage

63%

30%

27%

23%

20%

16%

16%

14%

27%

12%

13%3%

4%

6%

13%

46%

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Have done Plan to do

Please tell me whether you (and your spouse) have done that, plan to do that in the future, or have no plans to do that? (Retirees, n=302; Pre-retirees, n=300)


Buy a product or choose an employer plan option that will provide you with guaranteed

income for life

Purchase health insuranceto supplement Medicare or participate in an employer-

provided retiree health plan

Move into or arrange for care through a continuing care

retirement community

Buy long-term care insurance

(76%)

(75%)

(33%)

(39%)

(16%)

(16%)

(34%)

(43%)

20

Instead, Most Try to Manage Risk Themselves

56%44%

56%36%

56%48%

48%50%

51%

18%36%

14%

34%

6%13%

45%

51%

27%

26%44%

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Have done Plan to do

Please tell me whether you (and your spouse) have done that, plan to do that in the future, or have no plans to do that? (Retirees, n=302; Pre-retirees, n=300)


(74%)

(84%)

(81%)

(54%)(62%)

(79%)

Eliminate all of your consumer debt, by paying off all credit cards

and loans

Try to save as much as you can

Completely pay off yourmortgage (Retirees, n=269;

Pre-retirees, n=242)

Invest a portion of your moneyin stocks or stock mutual funds

Cut back on spending(65%)

(83%)

(88%)

(88%)

21

Agenda

Introduction and contextThe big puzzles– Risk perceptions– Longevity– Life income– Longer work – Adequacy


22

Puzzles Around Longer Work

Many people say they want to work in retirementMany people retire earlier than planned– Don’t plan for premature retirement risk

Displaced worker research shows it takes longer to get jobs at higher agesOther research indicates that older applicants get fewer call backs – Age discrimination? Will this change as population

ages?Result: still unknown what the effect of longer work will be on future retirement patterns

23

Pre-retirees Expect to Work Longer

Pre-retirees (%)Retirees (%)

13--Will not retire--3Doesn’t apply152Don’t know

20866 or older21565182062 to 64122955 to 61234Under age 55

2005 (n=253)2005 (n=302)Age category


How old were you when you retired/began to retire from your primary occupation?/At what age do you expect to retire from your primary occupation?(Among retirees and employed pre-retirees)

24

Timing of Retirement Among Retirees

36%39%

43%39% 37%

55%

49% 50% 50% 52%

6% 6% 6% 6% 6%

2000 2001 2002 2003 2004

Earlier than planned About when planned Later than planned

Source: EBRI/ASEC/Greenwald, 2000-2004 Retirement Confidence Surveys

25

Future Labor Supply Adequate?

Number of new entrants to labor force will be relatively lower than in past decadesNumber of retirements up (if timing of retirement unchanged) Shortages: experts disagree– Range of predictions – from none to very big– Shortages in some occupations seem inevitable: e.g., nurses,

other medical professionals, nuclear engineers, other technical occupations

– Likely to be specific blue-collar occupations with problems– New sources of labor supply: immigration + off shoring– Department of Labor projections assume markets clear and

conditions adjust

26

Agenda

Introduction and contextThe big puzzles– Risk perceptions– Longevity– Life income– Labor shortages– Longer work – Adequacy


27

Puzzles Around Adequacy

Traditional actuarial view: need 70% - 80% of pre-retirement income (if spend most income pre-retirement) to maintain lifestyle (Aon/Georgia State Study) Range of views – from 40% up; assume major changes in lifestyleReasons to spend more or less Individual needs change over timeResult: topic for future research

28

Focus Groups: Decision to Retire

Most retired before age 62A number were burned outSome were offered packagesMany retired before they plannedKey findings– Informal approach to retirement – Very “intuitive” sense of financial needs

Source: SOA Focus Groups on Financial Management in Retirement

29

Focus Groups: Informal Approach

Informal approach to retirement – Most had a good sense of their living expenses

• Did not have exact figures or projections how those might change– Determined that their Social Security, pension and income from

investments could provide for their monthly expenses

A minority used financial advisor to calculate needs– Most went to an advisor after they decided to retire to “check in”

Decision to retire generally made right before retirement– None had targeted accumulations of savings

– None had targeted retirement date


30

Agenda

Introduction and contextThe big puzzlesMoving into future/recommendations

31

The Findings and the Big Questions

The research can help inform us as we think about these big questions– What is appropriate role of government, the

employer and the individual? How should risk be shared? Can each party realistically meet their commitments?

– What are appropriate eligibility ages to start benefit payments (retirement ages)?

– How important is lifetime income?– Are there special issues for the boomers, a

cohort in the middle of a transition?

32

Summary

Given that – More retirement risk is being transferred to individuals – The behavioral finance and psychological barriers to

retirement planning won’t go away We need to be aware of the following – We will continue to find major gaps in personal risk

understanding and poor risk management strategies– Widows and very old will continue to be vulnerable– Education is desirable, but there are limits on what it

can accomplish– A substantial minority that retires earlier than expected

and a substantial minority that lives longer than expected will be at high risk

33

What Should 21st Century Programs Look Like?

Best retirement programs will be those that work without or minimize individual actionNeed to actively develop new ways of risk sharing – Sharing risk between employers and employees

• DB/DC models put all risk on one or the other – Use of intra-generational risk sharing models in

addition to intergenerational models– Other retirement plan models (e.g., TIAA-CREF)

Traditional Social Security will be very importantDB plans can still add valueNeed to address health and long-term care systems

34

What is Actuarial Profession Doing to Create a Better Future?

Retirement 20/20– Exploring new options– Current systems put too much risk on

employer or employee – seeking a third way– Blank sheet of paper– Focusing on range of risks and need for

pooling– Focus on intra-generational vs. inter-

generational solutions, role of extended family as well as employer and government

35

Retirement 20/20 – Moving Forward

Next step – Diverse group of experts to be convened in

September 2006What will you need to do?– Current options are product of current law– As new options emerge, enabling legislation

likely to be needed

36

For additional information, feel free to contact:

Heather Jerbi, American Academy of Actuaries

[email protected]

(202) 223-8196

Or

Emily Kessler, Society of Actuaries

[email protected]

(847) 706-3530

http://www.actuary.org/

37

Appendix

Focus group study available More on risk perceptionsLabor force shortagesPhased retirementBehavioral finance

38

Focus Groups on Financial Management in Retirement

Sponsored by the Society of ActuariesGoal: understand decisions retirees make in retirement when they don’t benefit from substantial annuitization Six focus groups (Hartford, Chicago, Phoenix)Participant criteria– Ages 60-72– Retired two to ten years– Financial decision maker– Separate groups for married, single individuals

39

Focus Groups on Financial Management in Retirement

Financial criteria– Investments of $50,000 to $500,000 in 401(k) or other

employer sponsored plan– Total retirement savings of $100,000 to $500,000 at

retirement– $100,000 to $2 million in all investable assets

(including real estate)– At least 25% of income comes from own savings– Had hoped to include only individuals whose only

annuity source was Social Security but weren’t able to find them

Results will be available at http://www.soa.org/ccm/content/areas-of-practice/special-interest-sections/pension/post-retirement/

40

Focus Groups: Intuition Reigns

Gave retirees “scenarios” to test how they determined if someone could afford to retireProcess effective, but intuitive– Calculate monthly expenses– Add up monthly benefits from Social Security and

pension plan– Derive shortfall– Add up investable assets– Multiply investable assets by approximately 6% to

derive expected investment income– Retirement feasible if expected income fills shortfall


41

Appendix

Focus group study availableMore on risk perceptionsLabor force shortagesPhased retirementBehavioral finance

42

Health and Long-term Care

Major concern for retirees and pre-retireesMajor decline in retiree health insurance– Big increases in employer health costs– Increases in premiums, co-payments where coverage

is offeredProjected costs of both Medicare and Medicaid represent a major national problem– Private long-term care coverage expensive, rarely

usedVery uncertain future

43

Health and Long-term Care Risks Are Most Likely to Worry Pre-retirees

23%

42%

24%

35%

13%

16%

26%

14%

18%

29%

23%

32%

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Very concerned Somewhat concerned

You might not have enough money to pay for a [nursing

home/nursing care]

You might not have enough money to pay for adequate

(2003/2001: good) health care

You might not be able to rely on children or other family members

to provide assistance

How concerned are you that . . . ?(Retirees, n=302; Pre-retirees, n=300)


(46%)

(75%)

(52%)

(61%)

(34%)

(26%)

44

54%43%

49%44%

17%20%

12%19%

5%8%

29%

21%54%

21%34%

32%49%

15%28%

37%14%

18%

27%48%

Major source Minor source

RetireesPre-retirees






Social Security and DB Plans Major Sources of Income for Today’s RetireesPlease tell me whether each of these is/you expect each of these sources will be a major, minor, or not a source of income for you. (Retirees, n=302; Pre-retirees, n=300)


(80%)(91%)

(68%)

(39%)

(20%)

(74%)

(70%)(35%)

(43%)(67%)

(74%)Regular income from an

employer’s DB plan

Social Security

Payments from a payout annuity

Employment

Regular withdrawalsfrom an IRA, bank or investment account

Regular withdrawals froma DC plan, or from rollovers

(36%)

45

Inflation

Second most important risk concernFocus groups indicate that little is done to address the issue– Survey shows little understanding of effect of

inflationExperience of last few years– Big increases in health costs and premiums– Otherwise modest inflation

Very serious long term issue

46

Inflation Continues to be a Top Concern of Retirees

21%

26%

17%

23%

20%

28%

18%

16%

15%

17%

36%

18%

27%

19%

24%

16%

17%

26%

29%

38%

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Retirees

Pre-retirees

Very concerned Somewhat concerned

You might deplete [your] savings and be left only with Social Security

You might not be able to keepthe value of your savings and investments up with inflation

You might not be able to maintain a reasonable standard of living

for the rest of [your life]

You might not be able to afford to stay in your current home …

Your spouse may not be ableto maintain the same standard

of living after your death …

How concerned are you that . . . ? (Retirees, n=302; Pre-retirees, n=300)


(51%)

(65%)

(40%)

(43%)

(59%)

(38%)

(55%)

(38%)

(34%)

(31%)

47

Half Think That Prices Will Be at Least Double 10 Years From Now

11%

26%

20%

13%

10%

19%18%

23%

27%

17%

7%9%


Suppose your weekly groceries today cost you $100. How much do you think they will cost in 10 years?


Cost of $100 of Groceries in 10 Years

Under $150Avg. Infl.

≈ 4% or less

$200-$249Avg. Infl.≈ 8%-9%

$250-$499Avg. Infl.≈ 10%-17%

$150-$199Avg. Infl.≈ 5%-7%

$500 or moreAvg. Infl.

≈ 18% or more

Don’t know

48

While Half Cite Personal Life Expectancies Below Average . . .

34%

22%

4%

12%

17%

11%

35%

16%

9%

15% 15%

10%



Until what age do you think that you, yourself, can expect to live?

Source: Society of Actuaries, 2005 Risks and Process of Retirement Survey1Based on UP94 Life Tables projected to 2005.

Difference Between Population Life Expectancy1 and Personal Life Expectancy

Below average Above average

49

… Most Think Their Personal Life Expectancies Are Average or Longer

11%

5%

41%

5%

20% 18%14%

4%

44%

5%

19%

13%



Until what age do you think the average person your age and gender can expect to live?Until what age do you think that you, yourself, can expect to live?


Difference Between Personal Life Expectancy and Respondent Estimate

Below average Above average

50

Appendix

Focus group study availableMore on risk perceptionsLabor force shortages Phased retirementBehavioral finance

51

Puzzles Around Labor Shortages: Will Opportunities Be There?

0

0.5

1

1.5

2

2.5

3

Ann

ual g

row

th rat

e

1950s 1960s 1970s 1980s 1990s 2000s(est)

2010s(est)

2020s(est)

2030s(est)

2040s(est)

Decade

Actual/projected civilian labor force growth rates

Wide range of views around future shortages of workers– Labor force growth predicted at 1.1% per annum over 2002-2012

period – But growth of only 0.6% per annum 2000-2050

Source: Horrigan, “Employment Projections to 2012: Concepts and Context,” Monthly Labor Review, February 2004

52

Puzzles Around Labor Shortages: Will Opportunities Be There?

BLS projections based on assumption that labor market clearsMany ways to clear a labor market– Immigration, technology, work organization,

outsourcing, flexible workers, overtimeWe expect shortages in some occupations and industries but will this overall lead to more opportunities for seniors?Will workplace evolve to make it easier for seniors to work (e.g., age discrimination, part-time work)The experts disagree about labor shortagesSource: Horrigan, “Employment Projections to 2012: Concepts and Context,” Monthly Labor Review, February 2004

53

Puzzles Around Labor Shortages: Can Older Workers Meet the Demand?

Study by Richard Johnson on the trends in job demands among workers aged 55 – 60 between 1992 – 2002More older workers now in jobs that don’t require physical demands – 2 of 5 older workers in jobs that never required much physical effort

But– The share of older workers whose jobs always require substantial

physical effort did not fall significantly over the last decade• 1 in 5 workers report their jobs almost always require substantial physical

effort– Level of non-physical demands has increased significantly, increasing

difficulty and stress of those jobsConclusion: “When devising ways to encourage older adults to delay retirement and remain at work, policymakers should provide an adequate safety net for those adults whose demanding jobs and health problems force them to retire early.”Source: Johnson, “Trends in Job Demands Among Older Workers, 1992-2002,” Monthly Labor Review, July 2004

54

Labor Shortages Will Create Opportunity …"Shortages in a wide range of occupations that are evident todayprovide a glimpse of greater shortages to come. Current trends point to chronic shortages across the entire spectrum of the occupations and industries, but most especially in those that offer the greatest potential for economic growth and rising incomes over the next 30 years. Over the next 30 years, the labor force needed to maintain current per capita growth in the standard of living will increase to nearly 200 million, but current growth of the working age population, productivity growth trends and current labor force participation rates point to an available labor force of only 165 million. The shortage may reach a total of 35 million workers – 21% more than the available labor force – in 2031."

Edward E. Potter, President of the Employee Policy FoundationOctober 11, 2001 letter to John Boehner, Chairman,Committee on Education and LaborUS House of Representatives

55

Labor Shortages Won’t Exist

Peter Cappelli, professor of management and director of Wharton's Center for Human Resources, says that predictions of a labor shortage are false:– Even though the baby-bust group is 16% smaller than the baby-boom

group, not every subgroup is smaller (e.g. college enrollments have not dropped as a higher percentage are enrolling in college.)

– Predictions of a labor shortage are based on the unrealistic idea that baby-boomers will retire at age 65. Many boomers will work past age 65, although they may change the work they do.

– Individual companies do not usually reflect the demographic profile of the United States. Companies' profiles reflect their own histories, and the periods of time when they were growing and changing. Some companies are older, some are younger.

– Shortages in specific occupations or locations are a different issue. It seems quite likely that at a minimum there will be shortages in specific occupations.

Source: Cappelli , “What Labor Shortage? Debunking a Popular Myth” Knowledge@Wharton, August, 2003 (available on-line at knowledge.wharton.upenn.edu)

56

Appendix

Focus group study availableMore on risk perceptionsLabor force shortagesPhased retirementBehavioral finance

57

Phased Retirement Already Exists InformallyIn the past 12 months, have you worked for pay . . . ? (Among retirees providing retirement age from primary occupation, n=274)

Not worked for pay

60%

Full or part time,part of the year

12%

Part time13%

Full time15%


58

And Phased Retirement Will Likely Increase in the Future

69%

13% 11%5%

38%

29%

21%

8%


Which statement comes closest to describing how you retired/plan to retire from your primary occupation? (Among those providing retirement age from primary occupation)


Stop workingall at once

Continue to work for pay part time

or periodically

Gradually reduce the number of hours you

worked before stopping completely

Continue to work for pay full time

59

52%

46%

1%

A youngerage

The sameage

An olderage

Many Pre-retirees Would Alter Plans if Could Collect Pension During Phased Retirement.

Yes37%

No58%

Don't know/Refused6%

If [the] law were changed so that you could cut back on your working hours and … start collecting some of your pension, would this change your plans for retirement? (Among those expecting to receive pension from last employer, n=105)

(n=41)


If yes: Do you think you would start to retire at . . . ?

60

1 in 3 Continue to Work for the Same Company as Before Retirement

40%

31%27%

4%

28%32%

27%

16%


When you worked in retirement, which statement comes closest to describing what you actually did?/After you retire, do you think you will . . . ? (Among those continuing to work in retirement)


Worked for a differentcompany

Worked for the same company as before

Became self-employed

Don’t know/Refused

61

A Majority Use Training and Skills from Their Primary Occupation

45%

26%

33%

1%

33%

25%

35%

7%


When you worked in retirement, which statement comes closest to describing what you actually did?/Do you think the work you do for pay in retirement will be . . . ? (Among those continuing to work in retirement)


The same as before Different than before, but built on the same

training and skills

Entirely different from before

Don’t know/Refused

62

Pre-retirees Don’t Consider Premature Retirement RiskWhat event or situation occurred at age X that leads you to say you retired at that age? (retirees) / What event or situation do you anticipate occurring at that age that leads you to say you will retire? (pre-retirees)

19%5%Had enough money to stop working2%5%Got tired of working/ready to retire--5%Family member had medical problem

4%7%Switched to another career18%10%Started receiving pension

--11%Company closed/downsized5%19%Health problems/became disabled

20%22%Stopped working completely

Pre-retirees(n=231)

Retirees(n=242)

Top mentions (multiple responses accepted)


63

Appendix

Focus group study availableMore on risk perceptionsLabor force shortages Phased retirementBehavioral finance

64

Findings from Behavioral Finance

Motivating individuals to plan for retirement is extremely difficult– The payoff for behavioral change is quite uncertain– Workers do not easily buy the idea of payoffs in the

distant future– The promise of pleasure tomorrow means pain today– The wrong decision yields instant gains– There is no immediate tangible reward for saving now– The savings decision can be postponed without

immediate penalty– There are no functional deadlines for action

Source: Gary Selnow, “Motivating Retirement Planning,” from Mitchell and Utkus, Pension Design and Structure, Oxford University Press, 2004

65

Psychological Barriers

Pre-retirees don’t actively react to retirement risk because of the lack of a visceral risk perception – No emotional experience of retirement risk

• Risk perceptions are more influenced by association and affect-driven processes than analytical processes

– Risk carries low emotional intensity and perceived threat

• Abstract representation of future (living on 50% of income) versus concrete reality of alternate (buying vacation home)

Retirement risk psychologically uncomfortable– Action requires contemplation of own demise

Source: Elke U. Weber, “Risk Perception in Risk Management Decisions,” from Mitchell and Utkus, Pension Design and Structure, Oxford University Press, 2004

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